JULY 2014 HOUSE PRICE INDEX: Growth rate declined mildly again, as housing market’s growth momentum gradually slows

AUGUST 5, 2014

According to FNB’s housing market data, the general picture is one of a market whose pace of growth/improvement appears to have been gradually slowing down. The term “slowing pace of improvement” should not be confused with a “deteriorating market”.

Therefore, the solid performance of the housing market continues, with still-positive house price growth in real terms, and an improved balance between demand and supply, but this pace of growth appears to have been slowing down in recent months.

According to the FNB House Price Index, the average house price for July 2014 rose 7.2 year-on-year. This is slower than the previous month’s revised 7.5%, and represents the 6th consecutive month of gradually slowing since the 8.6% year-on-year inflation rate recorded in January 2014.

Real house price growth (i.e. when house prices are adjusted for consumer price inflation), came in at 0.84% year-on-year in June (July CPI not yet available). This represents a slight slowing from a revised 1% real price growth rate in May, with CPI inflation recording 6.6% in June.

The average price of homes transacted in July was R959,394.

In real terms, the FNB House Price Index for June was -18.9% down on December 2007, the month in which last decade’s boom time peak in real house prices was reached. In nominal terms, house prices by July 2014 were 21.1% higher than December 2007.

Examining the longer term performance over a 10 year period, however, in real terms the index is still 16.3% higher than June 2004, and 105.96% higher in nominal terms compared with July 2004.

FNB’s valuers have also experienced a slower pace of market improvement since early-2014, after a strong surge through 2013

While the available residential market indicators still point to a well-balanced market, the FNB Valuers’ Market Strength Index has seen its year-on-year growth slowing since early in 2014, in line with the slowing direction in year-on-year house price growth.

This may be reflective of 2 factors, i.e. an economic contraction in the 1st quarter of 2014, and possibly another contraction in the 2nd quarter, exerting pressure on employment and disposable income growth, as well as the 75 basis points’ worth of interest rate hikes since the beginning of 2014 by the SARB (Reserve Bank).

From a revised level of 49.16 in June, the FNB Valuers’ Market Strength Index rose slightly to 49.27 in July. This rise is the result of a further rise in the Valuers’ Demand Rating, which was accompanied by a lesser rise in the Valuers’ Supply Rating.

However, while still rising, the year-on-year rate of increase in the Valuers’ Market Strength Rating slowed for the 5th successive month after peaking in February 2014.

The SARB’s gradual interest rate hiking should contribute to a “rational and healthy” residential market

We would argue that a slowing pace of strengthening in the residential market at the present time is a welcome development. The market has regained its health, but any move towards a so-called “boom” could ultimately prove problematic, as it would be totally out of line with South Africa’s very weak economic fundamentals. Price booms can also begin to drive speculative activity and buyer panic (where buyers rush to get into the market fearing that if they don’t do it now it will be un-affordable later) on a large scale, which ultimately “ends in tears” when the market overshoots.

We thus see it as beneficial to the health of the market when the SARB sets interest rates at levels where home mortgage lending rates are positive in real terms according to our alternative house price-adjusted real interest rate calculation. Instead of converting Prime Rate from a nominal to a real rate using CPI, we instead use the FNB House Price Index. When this version of Real Prime Rate is significantly negative (as it was back around 2004/5), i.e. where house price inflation exceeds the Prime Rate percentage, it can imply a favourable environment for short term speculation in residential property.

Currently, our alternative Real Prime Rate is low but still positive at 1.8% in July, up from a previous month’s 1.5%, and gradually rising as interest rates are hiked and house price inflation slows. This mild rise is seen as a welcome development in order to promote a “rational” residential market.

Outlook – we continue to expect further gradual slowing in the pace of house price growth

Our outlook continues to be one of further gradual slowing in house price growth, back into line with the economic fundamentals which remain very weak. Our economic growth forecast for 2014 as a whole is a meager 1.5%, improving somewhat to 2.5% in 2015 on the assumption that the levels of industrial action-related disruptions will decline next year.

However, against some expected economic and household disposable income growth improvement, we expect the SARB to continue with its normalization of interest rates, which implies further hiking from abnormally low levels. Our forecast is for Prime Rate to rise further to 9.5% by the end of 2014, and then to 10.25% by the end of 2015. This in turn will imply some moderate increase in the Household Sector Debt-Service Ratio (the cost of servicing the Household Sector Debt Burden expressed as a percentage of Disposable Income), thus slowing growth in residential mortgage credit demand.

The resultant forecast for house price growth is a 7.3% average growth rate for 2014, the annual average being boosted by the above-8% house price inflation early in 2014, tapering to an average rate of 5.7% in 2015.

You can download the full FNB Property Barometer July 2014 House Price Index here.